BONDS

BONDS



Introduction

Bonds are debt securities issued by corporations, governments, or other organizations & sold to investors

Bonds are massive loans & as such requires these organizations to borrow money from more than one source.

Investors buy small units of this debt.


Types of Bonds

They vary depending on who issues them, length until maturity, interest rate, & risk

Government bonds/Treasury Bonds(T-bonds

    • Bills - a year or less to maturity
    • Notes - 1 to 10 years to maturity
    • Bonds - More than 10 years to maturity
    • TIPS are Treasury bonds that protect against inflation

  • Municipal bonds

The safest are Bills, but pay the least interest, while Bonds are less risky than other bonds but with higher interest.

These are issued by cities & localities & are a bit riskier than Government Bond

  • Corporate bonds

These are issued by companies & have more risk than Government Bonds.

Companies prefer bonds over Bank loans because of low interest.


Bonds are either publicly traded on exchanges or sold privately between a broker and the creditor.

The two ways of earning through Bonds


  1. Income through periodic interest payments(Coupon Payments) but to realize full earnings you have to hold the bond to maturity.
  2. Profit on Resale from the resell of the bond at a higher price than you bought it.

How to buy Bonds 

Most bonds are traded over the counter (OTC) through a broker or directly from an issuing government entities.

Individual bonds are purchased whole with a minimum investment value & or increments.

T-Bonds Minimum value

🔸Bills - KES 100

🔸Bonds - KES 50


Bonds can be sold as:-

  1. New Issues(Primary Market) - Similar to buying stock in a company’s IPO at  the offering price.
  2. Secondary Markets - Buying from holders who sell their bonds prior to maturity

Note: Buying bond funds is a good option instead of individual bond


Buying Government Bond in Six Easy Steps

1. OPEN A CDS ACCOUNT

A CDS Account is an account allocated to a customer, either an Individual or a Corporate, for the purposes of investment in Government Securities. Opening a CDS account is absolutely free. You are only required to submit a mandate card, together with a copy of your ID or passport and a coloured passport size photograph.

2. DECIDE HOW YOU WANT TO INVEST

Determine whether you want to invest in Treasury Bills or Bonds and look on our Invest in Government Securities page to see what is currently being offered. You also need to determine how much you would like to invest.

3.     COMPLETE AND SUBMIT AND APPLICATION FORM

On these forms, you'll provide information like: 

  • Your name and contact information
  • Your CDS and commercial bank account numbers
  • The issue number of the Bond or Bill you would like to invest in
  • The face value you would like to invest

 These forms need to be submitted by 2pm on the auction days, which are either Wednesdays or Thursdays.


4.     CHECKING THE AUCTION RESULTS

You'll need to call the Central Bank to find out whether your application was successful and, if so, how much you need to pay for your Bill or Bond.

5.     PAYMENT

It is critical that you pay for your investment by 2pm on the Monday after auction, the end of the payment period for the previous week's auctions. If you do not pay, you can be barred from future investment in Government Securities.

6.     COLLECT YOUR RETURNS

Upon maturity or interest payment dates, all payments are automatically remitted to the commercial bank account indicated on your CDS account.

The following steps are for those who wish to buy government bonds directly from the Central Bank.

You can also invest through your Commercial Bank with a client account. Investing this way is a less hands-on  but you will have to pay extra fees.

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